How I Turned $1,000 into a Million Dollars in Real Estate ...

Good post Michael! Just thought I'd comment on the following:

> Buy and sell (trading, day trading) is high
> risk and as about as guaranteed as placing
> bets at the casino. - Despite all the
> charting available.

> Buy and hold is lower risk and requires
> analysis skills. Lack those skills and you
> might as well play a game at the casino.

> Buy and hold index funds is also lower risk
> and doesn't require analysis skills. It also
> assumes the index will continue to rise as
> it has done previously.

I agree that day trading is high risk. Essentially when you invest in the market your total return is determined by the following:

1. The investment return for the investments you hold over the time you hold it
2. The transaction costs you incur
3. The taxes you pay

If you add no value as a day-trader, and you add no value as a buy-and-hold investor, then you'd expect the average return on the first point -- investment return -- would be roughly the same.

The key difference arises with the second and third points. Transaction costs -- namely, brokerage fees and so forth -- are significantly higher for traders than they are for buy-and-hold investors, and these commissions eat into the profit for traders.

With taxes, at least in Australia a buy-and-hold investor typically pays capital gains tax which is half the rate of the normal tax rate that traders would pay. This too has a significant effect on long-term profitability.

Before you think taxes are insignificant, let me illustrate with this example based on Australian taxes. If you used other countries, it might not be as extreme.

In Australia, the highest tax rate for people with high incomes is 50%. If you hold stock for over a year before you sell it you tax it at half the rate, or roughly 25%.

If an investor invests $10,000 for 10 years at 10%, they'll have $26,000 at the end, pay $4,000 in tax, and have just under $22,000 left over.

For a trader to achieve the same $22,000, but paying tax each year rather than at the end and at a higher 50% rate, they'd need to achieve a return of 16%. That's a big difference, and it doesn't even include the transaction cost effect yet.

> If I had to choose between investing $5,000
> in the stockmarket (even in an index fund)
> or using it to increase business, I would
> use it to increase business. What I then do
> with the increased profits is the topic of
> another discussion.

The stock market is essentially a passive investment. For the most part it's priced about right to give investors a modest return on their capital.

When you run a business, you'll have internal investment opportunities that may return much greater returns, and better yet, are exclusive to you to take advantage of. Thus, in many cases investing in internal projects is the way to go.

Stocks are mainly interesting, in my opinion, because the skills used to analyse or value stocks are the same used to analyse or value internal business investment opportunities.

- Thomas.